The Bank of Thailand recently sent a warning about increasing risks associated with auto loans due to competitive tactics by some banks in collaboration with some auto companies and car dealers to approve loan amount beyond the collateral value. For example, they did not deduct the discount the customers received from the car price and/or set up higher sale price than the one marked by car companies to enable customers to underpay the down payment. In some cases, the customers are not required to pay down payment at all or they can even receive a cash-back when purchasing a car. These tactics have inflated the demands for cars beyond the fundamental factors, particularly the financial capacity of some customer groups. In 2018, the total car sales rose to 1.04 million units with outstanding hire purchase loans in financial institutions (excluding captive finance) increasing 12.6 percent to THB1.07 trillion, the highest growth rate in six years.
It remains to be seen whether the latest warning by the Bank of Thailand and its random probe into the credit approving process of commercial banks will result in elevating measures to tighten loan approval in the same manner as the housing loans where the macro-prudential measures took effect from April, 1, this year. At any rate, the overall domestic car market and the auto loan trend in 2019 are likely to see the status quo due to many negative factors including the slowing Thai economy. If the Bank of Thailand issues additional measures around early third quarter such as a minimum requirement for down payment at 20-25 percent, the volume of car sales may decrease further as the auto loan growth rate is likely to slow down this year. The impact from the measures also depends on the timing of the enforcement.
In summary, regardless of whether the Bank of Thailand's examination would result in tightening controls in auto loans, KResearch views that it should raise awareness among operators about the importance of observing market regulations and standards based on the customers' financial readiness and their debt service ability. The latest development should help stabilize their business operation in the long run, while extending the scope of risk supervisory mechanism to cover secured auto loan from the primary market linking consumers and car producers to the secondary market including used car loans and auto-for-cash (car title loan). Loan control regulations and criteria have gradually been introduced such as an announcement by the Contract Committee of the Office of the Consumer Protection Board B.E. 2561 (2018) and the Bank of Thailand's requirement to have car tile loan business subject to approval. These measures will improve auto loan mechanism standard in screening debt service ability of the borrowers. Customers will get a justifiable deal and auto loan approving activities will not accumulate systematic risks to the financial sector and economic system in the long term.